Digitization Could Ease Msmes’ Access To Supply-Chain Finance

Context: The integration of GST data with bill-discounting platforms can help track MSMEs creditworthiness.

Significance of integrating GST architecture to MSME sector

• Bridging information gap in MSME sector: As a significant data on financial health of MSME enterprises can be obtained through monthly returns, electronic invoices and e-way bills.
  • This data can be used for financing mechanisms like the TReDS (Trade Receivables Discounting System), which is an electronic platform for facilitating the financing/discounting of the trade receivables of MSMEs through multiple financiers.
• Assessing creditworthiness of MSMEs: The creditworthiness of MSMEs can be judged from three data points on the GST system-
  • Input tax credit (ITC) being claimed by the MSME.
  • Trade volume as per the e-way bills (EWBs).
  • Trade volume as per the electronic invoices raised.
• Formalisation of MSMEs: The Parliamentary Standing Committee on Finance, while reviewing The Factoring Regulation (Amendment) Bill, 2020, also recommended that the GST e-invoices above a certain threshold should flow directly to the TReDS platform.
  • MSMEs need to be brought into formal credit channels by integrating GST architecture with TReDS and Udyam.
• Streamlining procurements from MSMEs by government departments: Integration of GeM (Government e-marketplace), will help government departments, PSUs, CPSEs, etc, finance their payments to MSME sellers of goods and services.
• Provide for buyers’ acceptance: An EWB that is coupled with an e-invoice can act as a supporting document for a factoring unit, enhancing its authenticity.
  • It would serve as valid proof, like a goods receipt note.
• Factoring agencies: GST system is supposed to develop a rating system for all taxpayers based on their tax compliance and other factors, which may prove valuable for factoring agencies on the TReDS.
• Digitisation and access to finance: All these linkages will help digitize the supply chain of MSMEs, making their access to finance much easier.